Are You Ready for the Change in the Market?

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I’ve been having lots of conversations with other investors lately about real estate market trends and strategies to plan for next 3-4 years.

So I thought I’d share some of that here.   Leave me your comments, thoughts and responses at the bottom.  Do you agree, disagree?  Are you employing some of these strategies now?

First of all a disclaimer:  I am not an economist and you shouldn’t take my predictions at face value.  Do your own due diligence and research!

So…About a year ago I wrote a blog post called “Is Housing Crash Coming”, which has since been shared over 1,000 times online.

In that blog post, I wrote that I didn’t think we were headed for a crash anything like 2008 anytime soon and I explained my reasons:

  • Lack of Inventory in most markets
  • Much lower levels of subprime lending over last 8 years vs. pre-2008
  • Not enough construction vs. new household creation over last 10 years
  • Overall strong economy for foreseeable future

But I did think a pullback is coming. And in some places it’s already being felt, in terms of:

  • Slower retail sales (longer days on market, price reductions)
  • Pull back in new development

All of this is inevitable due to rate increases (with 3-4 more rate hikes scheduled in next 12 months) and people’s fear of a recession that seems overdue.

In my “Is a Housing Market Crash Coming?” blog post, I also talk about some general economic issues that should cause us all to worry and fear a downturn, not necessarily real-estate related.

So what do you do now to take advantage of THIS market AND prepare for what’s to come?  Let’s talk some real estate strategies first:

[1] This is a great time to be wholesaling! Buyer demand is huge and tons of people are overpaying for deals because they don’t know how to run their numbers

So if you can find great deals, you will have no shortage of hungry buyers to sell to.

Additionally, wholesaling doesn’t involve buying properties long-term or getting into rehabs, so if the market turns, you’re not at risk!  You’ll just do less deals for a while.

Actually, I am of the thought that if we hit a major real estate downturn, the experienced wholesalers will still make a killing

Why?  Because there will be buyers like me who will recognize buying opportunities during the market dip and actually buy more than at a time like this when everyone and their 7 uncles are overbidding for deals.

So build your buyer relationships now because those who will make it through the downturn will keep buying!

There are some really great trainings on finding deals and wholesaling here and here

[2] If you’re rehabbing today, I would focus on lower price points. As affordability starts to get squeezed by interest rates, demand will fall (and is already falling) first in higher price point segments.

In my market, that means houses under $300k are still in demand.  Anything under $200k is still selling like hot cakes and will continue.

But I’ve pulled back on any rehabs or new construction projects in the $400k+ zone.  Too much risk of being caught in the middle of a pullback, left holding the bag.

[3] I am still very bullish on adding high quality rentals to your portfolio.

There are 2 sectors I like here:

A. Affordable, blue-collar, low maintenance product. I personally don’t play in this market but if you’re buying/rehabbing good quality single family homes with no frills that can be rented affordably to people, you will always have tenants.

I have friends that only play in this sandbox and even do Section 8, and even in the worst recession they will be occupied.  Working class people will and families will always need good quality places to live.

B. New construction, higher-end rental product. My reasoning here is as follows:

  • People always want to live in new buildings
  • New construction allows me to have maintenance-free properties for many years
  • My leverage is higher vs. buying existing buildings
  • I have a product that will be recession-proof and will compete against bigger “Class A” buildings

I explain exactly how I build new construction rentals, including all my numbers in this training

What about preparing for what’s to come?  For next 3-4 Years?

I think it’s hugely important to position yourself correctly to not only survive any downturn but thrive and take advantage of it!

So here’s what I suggest doing:

[1] Prepare for buying opportunities:

If you’re one of our Rehab Valuator clients and know your numbers, then you may be passing on a lot of deals right now.  The fundamentals just don’t look that good.    But don’t worry.  Better buying opportunities are coming.

Now is the time to:

A. Build up your private money relationships. Private money is a largely misunderstood topic that we teach on a lot.   Private money isn’t found overnight.  These are relationships that you need to start building now if you haven’t yet.  Don’t try to line up money when you need it quick.   Line up money WAY in advance.

The Art of Private Money course teaches the entire process in detail.

And if you’re a Rehab Valuator Premium client then you already have an amazing $-raising tool at your disposal [check this out]

B.  Build up your banking relationships. Banks are notorious for panicking during real estate downturns and recessions.  But if you have good relationships with the right banks, they can be a great source of fairly cheap money when the time is right.

One thing I am doing right now refinancing big chunks of my portfolio, levering UP some properties while paying off others.  Then, in turn, I am taking the free & clear properties and getting a massive credit line against them.   That way I am not paying interest on money when I don’t need it but can also tap millions in purchasing power when the time is right.

[2] Re-evaluate your balance sheet.  If you are holding debt, especially bank debt, look at your leverage and your loan structure.  Do you have loans resetting or getting called in next 2 years?  Now is the time to renegotiate and extend those loans before rates go up even more.  

Are you sitting on some properties that have gained a ton of value?  Compute your return on equity (not on your cash invested but on equity).  Is your ROE less than 5-6%?  Sell them.  Use the proceeds to pay off other debt, delever and then possibly do what I suggested above with credit lines.

Similar to ROE analysis, I am a huge fan of performing 80/20 Analysis on my portfolio.  80% of your problems, problem tenants, maintenance calls, and turnover will come from 20% of your properties.  Now is a good time to sell those problem properties!

[3] Develop your skill set. Amateurs focus on what they can do today.  Pros constantly hone their skillsets so that when the time is right to strike, their smarter and more prepared then everyone else.   So if you’re not doing the amount of deals you want to be doing now, spend the free time you have learning and getting better.  Lots of great real estate education here, for example 

One of my most favorite investing strategies is Buy, Rehab, Rent, Refi, Repeat.  I’ve built most of my portfolio that way.  This strategy depends on being able to buy houses at a significant enough discount to where you can reposition them and refinance quickly.

[4] Add other streams of income that will help if real estate market crashes.    The list of what else you could be doing to supplement your income is virtually unlimited.  But you know what they say: “Average millionaire has 7 different streams of income”.  How many do you have so far?

Daniil Kleyman

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